Wednesday, August 05, 2015

US Economic Growth Remains Weak as Global Stresses Grow

Historically, from 1947 through 2015, the annual GDP growth rate in the US has averaged 3.26 percent. However, GDP growth has slowed considerably in the last decade. In fact, the average growth rate has been below 2 percent over the last ten years.

The aftermath of the Great Recession has been harsh, and the economy has been unable to realize the robust growth rates that typically follow recessions.

Since the economic recovery began in mid-2009, annual growth has hovered around 2 percent, well short of the nation’s historical average of 3.3 percent.

This has occurred despite the fact that the Federal Reserve has held short term interest rates at a remarkably low level of between 0 percent and 0.25 percent since December 2008. That’s seven years, if you weren't counting.

Incredibly, the Fed last raised interest rates more than nine years ago, in June of 2006. From a historical perspective, that’s nothing short of stunning.

However, the utilization of near-zero interest rates isn't the only extraordinary tactic employed by the Fed to prop up the stock market since the 2008 financial crisis.

The central bank also utilized another exceptional monetary stimulus measure: buying up government bonds and other assets (better known as quantitative easing, or QE), which has fueled one of the longest bull markets in history.

In other words, the Fed has created a massive stock market bubble, along with concurrent bond and housing bubbles. We’re right back to 2007 pre-crisis levels, with all the associated risks.

The problem with reflating the bubble is that all bubbles eventually burst.

In the process of blowing these bubbles, the Fed has expanded its balance sheet to a whopping $4.5 trillion. Unwinding that could create problems in the bond markets for years to come.

Despite the Fed’s historic and Herculean measures, the US economy continues to muddle along, still incapable of reaching its longterm average growth rate.

Gross domestic product rose at a 2.3 percent annualized rate in the second quarter, after growing just 0.6 percent in the first quarter.

Yet, according to leaked documents, the Fed projects the US economy will steadily decline through at least the year 2020, eventually falling to a mere 1.74 percent annual growth rate.

That’s very troubling.

After all the Fed has done, this is as good as it gets? We can’t even reach our longterm historical average growth rate of 3.3 percent? After previous recessions, the economy was generally booming, following the predictable pattern in boom and bust cycles.

The current economic expansion, which began following the end of the Great Recession in June 2009, has been the weakest of the post–World War II era. GDP has risen about half as much as in the average post–World War II era recovery.

One has to wonder how bad things would have been if the Fed hadn’t lowered interest rates to near zero, and expanded its balance sheet to $4.5 trillion buying Treasuries and mortgage bonds?

That’s why this is all so worrisome. The results have been so lackluster, yet the risks have been raised to frightening levels.

When there is another shock to the economic and/or financial systems, where does the Fed go from here? Negative interest rates?

Is QE4 merely a matter of time?

Our continual economic weakness, and the crashing of commodities prices, lead me to doubt the Fed’s ability to raise rates this year, as projected.

Many commodities have fallen to bear market levels last seen in 2008. We all know what happened next.

From Bloomberg:

"Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20 percent from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon."

That’s a flashing warning signal that shouldn't be ignored.

There’s no concern about inflation at present. As I noted previously, the real concern is deflation. Given that reality, how can the Fed possibly raise rates? In my estimation, it can’t.

The entire global economy is slowing, and the US won’t remain immune to it.

China’s economy is slowing, and it is grappling with the bursting of its real estate and stock market bubbles. The Latin American economies are a mess. Canada is in recession. Additionally, Europe remains mired with problems, not the least of which is the Greek debt crisis.

In fact, Standard & Poor’s just downgraded its outlook for the European Union to “negative” from “stable.” That’s an ominous warning sign.

The EU is in the midst of its own massive QE program, and that has S&P concerned.

The signs of a potential global recession are clear, and they are growing.

That’s why I don’t believe the Fed will be in any position to raise interest rates this year. Events are rapidly spiraling far beyond its control.

Most troubling, the Fed appears to be out of artillery, and won’t have the necessary tools when the next shock inevitably strikes.

That’s what is most worrisome, because it is only a matter of time.

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